POLICY RECOMMENDATIONS: In tandem with plans to realign the institutional incentives of Rhode Island’s welfare services, the RI Center for Freedom and Prosperity recommends the following specific reforms:

Implement a cash diversion program for new enrollees. Thirty-three other states have such measures to provide lump-sum cash assistance in lieu of full enrollment in the state’s welfare program.

Decrease the lifetime limit for assistance through the state’s Temporary Assistance for Needy Families (TANF) program from its current 48-month limit.

Enforcement. Increase accountability by implementing stricter sanctions for noncompliancewith work requirements. In Rhode Island, only 11% of TANF recipients are actively engaged in work-related activities, the second-worst rate in the nation. Strengthening the sanctions for failure to participate in work activities would likely increase work participation substantially in Rhode Island.

RI’s Poor Welfare Reform Performance

For the Ocean State, perhaps the most shocking finding in the Heartland Institute’s 2015 update to its “Welfare Reform Report Card” is that only 11.0% of Rhode Islanders receiving welfare payments through the Temporary Assistance for Needy Families (TANF) program are “working.” In this case, “working” would even include such activities as attending classes, doing community service, and receiving therapy to improve “work readiness.”

Nationally, TANF work participation ranges from 7.3% in Massachusetts to 68.7% in Wyoming, with a national average of 29.5%, according to the study. In the original 2008 version of the report card, Rhode Island ranked 43rd, with a work participation rate of 24.9%.

In that one statistics, Rhode Islanders can see the results of their state’s welfare-to-work policies, which Heartland graded an F and ranked 45th in the country. That grade and rank are given based on the Ocean State’s overall weakness in five areas of reform that should serve to draw people facing hard times toward work and self-sufficiency.

The Center recommends that lawmakers seriously consider implementing stronger reforms in areas of weakness. Legislators should be careful, however, to craft policies that take account of their state’s actual and unique circumstances.

Work Requirements

The requirement to work is the only area in which RI grades above a C, according to Heartland. As the state’s abysmal 11% work participation rate shows, however, it would be wrong to see the A grade as an indication that nothing can be done.

One consideration is that Heartland only applies three grades to this section: A for immediate work requirement, C for up to a three-month delay, and F for more than that. In Rhode Island, the immediate requirement isn’t so much working as having an “employment plan.”

A second consideration is, as mentioned above, that a wide variety of activities that might be better termed “work preparedness” count for the plan, and the General Assembly is moving in the wrong direction. In their 2014 session, for example, legislators removed the six-month limit that work-readiness education programs could be used to fulfill the requirement (2014 H7242 and S2476).

The third consideration is that Rhode Island’s statutes allow for a wide variety of exemptions, especially for single-parent families (60% of families receiving payments). So, while welfare recipients may technically be required to follow through on an employment plan, the requirement is easily waived and easily answered with activities that aren’t actually work.

Cash Diversion

Cash diversion is one of the two areas in which Rhode Island receives an F, because it has no such policy in place, according to Heartland, although the General Assembly has authorized it. The program would allow social workers to give those in need one-time payments that are relatively large, typically with a stipulation that they cannot receive TANF payments for a period afterward. The idea is to help cover one-time costs, like car repairs, that help family members keep working, rather than ushering them onto welfare.

In this area, the Center would caution that an additional cash diversion program should only be implemented as part of a strong welfare-to-work reform initiative, preferably with bureaucratic reforms that better align agencies’ incentives with the goal of reduced welfare rolls. In an agency without such a culture, or in which cash diversion programs are simply added to other benefits, they could make existing problems worse.

Regardless of whether such a program is created, the General Assembly should remove or limit the blanket authority that currently exists in law.

Integration of Services

Another area in which the Center would advise caution is integration of services, for which Heartland gave Rhode Island its second F.

On paper, the idea is sound. People toward the bottom of Rhode Island’s economic ladder probably don’t only need some money and a soft push into a job search. They also need various forms of therapy (e.g., for substance abuse) and other government services, including childcare, healthcare, heating assistance, and so on.

It makes a sort of intuitive sense to secure services that will help them market themselves as employees. Specifically, Heartland recommends reforms like locating all offices in one building and increasing the ability of case workers to sign their clients up for the full array of services.

The Center’s concern, which it has been expressing for years, is that activists seem to have something more insidious in mind, which we’ve dubbed a “Dependency Portal.” With all welfare programs integrated, and even automated, the emphasis could become on ensuring not that people have access to the programs that they need, but that the government is able to provide as many benefits as people may be eligible for.

Rhode Island is currently engaged in a Unified Health Infrastructure Project (UHIP) that Governor Raimondo’s budget projects to cost $229 million. As the Center understands UHIPs intended design, it will increase the risk without necessarily capturing the efficiencies that Heartland suggests. If the General Assembly remains intent on funding the project, it should move quickly to develop and implement reforms to safeguard against the development of a Dependency Portal.

Lifetime Eligibility Limits

As a state that provides welfare benefits to individuals for up to four years, Rhode Island receives a C from Heartland in this category.

Arguably, the Ocean State actually should receive a little more credit, here, because welfare recipients can only receive benefits for two years within a five-year period. On the other hand, the law does allow for “hardship exceptions,” which would seem to be broadly applicable to families eligible for welfare in the first place.

Moreover, the relevant statute contains potentially contradictory sections that muddy the waters of Rhode Island policy. This leaves the door open for the annual attempts at legislation that wears away at the requirement.

Not only should the General Assembly lower the lifetime limit, but it should also clarify the language of the law to be clearer. Clarity would ensure that regulatory interpretation cannot change the policy and that future legislative changes would have to be unambiguous.

Sanctions

Rhode Island’s second C grade comes in the area of sanctions, or the penalties that the state imposes when recipients don’t comply with the requirements of the program. Heartland notes that Rhode Island’s penalty is full elimination of monthly payments, but marks the state down because the payments are reinstated immediately upon compliance. A longer term penalty would give the requirement more force.

Institutional Reforms

As the above analysis makes clear, the Center does not dispute the value of some degree of safety net for Rhode Islanders who fall on hard times. The overriding goal of such policies, however, should be to guide our neighbors toward self-sufficiency and productive participation in the state’s economy.

The Heartland Institute lays out policy suggestions that would improve Rhode Island’s abysmal performance, but they require institutional incentives about which the Center is skeptical. Ensuring that Rhode Islanders can have full trust in their government to work toward the goals that give welfare programs their moral justification is a prior necessity for full, effective reform of the system itself.

Toward that end, the Center recommends developing institutional reforms to realign incentives for state employees so that individual case workers and agencies overall are motivated to move people off of public assistance and toward work. Such reforms are beyond the scope of this brief and would require additional research, consideration, and discussion.

They might include renegotiated employment contracts that shift the weight of compensation packages to reward success offloading beneficiaries. On an agency scale, they could also include pilot programs involving longer-term block grants.

In undertaking to reform Rhode Island’s public safety net — or in deciding not to do so — legislators must give full consideration not only to the needs of beneficiaries, but also the capacity of a struggling, fading private sector to support them. Legislators must also be constantly aware of the unintended consequences that their program can have, whether in terms of increasing dependency, of fostering a special interest culture within the bureaucracy, or of distorting the state’s economy.

By shifting money from certain side funds to the general fund and by borrowing money from the future via risky re-financing schemes, the Center rates the plan as a temporary band-aid approach, instead of major steps towards a long-term solution.

“Despite years of Rhode Island experiencing negative results, this budget continues and expands the state’s practice of assuming that government knows best, and that a few insiders in back rooms can solve our problems better than the rest of us can,” said Justin Katz, research director for the Center. “From tens of millions of dollars in phantom ‘trust us’ savings to millions more poured into slush funds for centralized economic development to a scary new ‘statewide property tax,’ several back-flips backwards overwhelm the few positive policy steps forward.”

The plan’s government-centric approach toward economic development that favors specific industries is merely an extension of the same, failed public policy approach that is responsible for putting Rhode Island into its current economic rut. The Center, instead, recommends broad based tax and spending reductions as the primary means to boost the economy.

Other than vague goals to reduce Medicaid and state personnel costs, multi-hundred million dollar deficits are still projected in future out years.

OTHER OBSERVATIONS. The Center soon plans to publish a policy brief that will povide a more detailed analysis of the budget plan, but today also makes the following observations:

The plan gives government more power in attempting to orchestrate economic development, and is a further departure from proven free-market principles

The plan continues the practice of new special interest spending programs at the expense of the average Rhode Islander

The new state property tax fee is a slippery slope that could lead to this tax being applied to lower valued properties in the future

The increased hospital fee and health insurance premium fees will likely result in more costs being passed down to consumers and will likely also lead to health insurance premium hikes

The vendor/supplier corporate tax credit idea is a handout to special interest big corporations

New pre-K, full-day K, and construction spending ideas are handouts to special interest unions

The new rental taxes will be a drag on our state’s vital tourism industry, especially harming smaller entrepreneurs

The higher cigarette tax will likely lead to even greater “black market” activity, with the state is unlikely to meet the increased $7+million revenue expectations

The increased town tipping fees to RI Resource Recovery could lead to increased property taxes in those towns

State Economic Prosperity and Taxation

Policymakers frequently debate how different methods of taxation affect their states’ economies. While most economists agree that higher taxes result in reduced investment and innovation, previous studies have not found overwhelming evidence that higher tax rates lead to lower eco­nomic growth.

To untangle this paradox, new research by economist Pavel Yakovlev for the Mercatus Center at George Mason University examines the effects of taxation on states’ economic performance, busi­nesses growth, and net migration rates. The study finds that higher state taxes correlate with lower economic performance, even when controlling for various factors. The magnitude and sig­nificance of this effect varies depending on the type of taxes and the type of economic activity in question. The study analyzes the relationship between states’ economic performance and tax variables including effective average tax rates, the personal income tax, and personal income tax progressivity.

A higher average tax burden reduces state economic growth. Dividing total tax revenue by gross state product (GSP) shows that a 1 percent increase in a state’s average tax rate is associated with a decrease of 1.9 percent in the growth rate of its GSP.

Taxes impact migration patterns. If higher state taxes lead to lower economic activity and employment, it is conceivable that people will move to states with better economic pro­spects. Of the nine states with no personal income tax, four—Florida, Nevada, Washington, and Tennessee—are among the states with the highest population growth rates in the country in recent decades. Also, data show that a higher personal income tax rate is associ­ated with a higher probability of residents migrating to a state with a lower tax rates.

Income tax progressivity affects the number of new firms. The number of new firms open­ing in a state is a key indicator of beneficial creative destruction and innovation that will improve living standards for the state’s residents over time. Other studies have found that new firm entry accounts for 20–50 percent of a state’s overall productivity growth. The lat­est economic data show that the rate of start-up creation is sensitive to personal income tax progressivity. A 1 percent increase in personal income tax progressivity is associated with a reduction of 1.2 percent in the growth rate of the number of firms.

While the data show an important relationship between GSP growth and average tax rates, the impact of average tax rates on per capita income is less clear. A 1 percent increase in a state’s average tax rate can be expected to decrease per capita income by 0.07 percent.

As previous studies have also noted, these findings can be sensitive to the time period, statisti­cal methods, and variables used. Nevertheless, the results still lead to a general con­clusion: not all tax variables exhibit a significant correlation with the selected measures of economic activity, but when they do, the relationship is usually negative.

CONCLUSION

Higher state taxes generally reduce state economic growth, GSP, and even population. It is clear that people produce or consume less, or even move to a different state, in response to higher taxes. Not all types of tax increases can be expected to significantly harm economic outcomes, but higher taxes are generally correlated with lower standards of living.

The budget unveiled in the Rhode Island House Finance Committee, last week, showed a $13.3 million decrease in state spending, compared with the governor’s proposed budget. Approximately $3.1 million of the reductions overlap with the Spotlight on $pending report that the RI Center for Freedom & Prosperity released in March, after a review of the governor’s proposal.

Another $52.9 million in Spotlight on $pending suggestions were in the budget, but were either not counted as a line item or amounted to transfers to federal funds.

“The legislature clearly has different priorities than the Center, but the fact that some of our suggestions found their way into the budget shows how important it is to have alternative voices,” says Justin Katz, who is the research director for the free-market think tank and a coauthor of the Spotlight on $pending report. At a State House press conference promoting Spotlight on $pending on April 2, Katz had told reporters that the Center hoped legislators would look to their analysis for ideas no matter what fiscal goals they were trying to reach.

Specific areas of agreement between the Center and the House were as follows (note that reductions are from the governor’s proposal, not from current spending):

A $1 million reduction in local funding for the State Council on the Arts.

Over $323,973 in savings by not adding new employees to a consolidated Diversity, Equity and Opportunity office.

Ending $159,585 in Public Utilities Commission personnel previously funded by the federal American Recovery and Reinvestment Act (ARRA), rather than absorbing them into state spending.

Saving $145,303 by running a new certificate of good conduct program for parolees with existing personnel.

A $100,000 reduction in payroll within the governor’s office.

Not adding a $75,000 per year Creative and Cultural Economy Coordinator to the state’s payroll.

The House also agreed with the $50 million in savings the Center recommended by not expanding the historic tax credit program as the governor wanted. However, neither the governor nor the House included those costs or savings anywhere in the budget.

Another area of partial overlap came with the Unified Health Infrastructure Program (UHIP), which will make it easier to enroll people in multiple government programs when they apply for any one of them. The Center expects this program, operated using the state’s health benefits exchange (HealthSource RI), to amplify the cost of social service programs and called for it to be ended. Instead, the House budget managed to transfer $2.9 million in near-term spending on the project from general revenue to federal sources.

“It’s going to take more feedback from Rhode Islanders to change way the state government operates,” says Katz, who would prefer the savings to be used to reduce the state sales tax rate to 3%, creating over 13,000 private-sector jobs. “Still, counting the tax credits and UHIP, the House budget includes 25% of the savings that we identified in Spotlight on $pending.”

The Spotlight on $pending report was produced in cooperation with the Taxpayers Protection Alliance and coauthored by Drew Johnson and Justin Katz.

RI’s 2015 includes corporate and estate tax reforms for big biz and the wealthy, but provides no relief for average family or worker. Read this unique commentary that takes a holistic look at the 3 phases of the economic cycle.

The state budget is like a talisman that government officials and special interests raise to ward off the evil spirits of tax reform. Anything that promises not to raise taxes, or at least not to be “revenue neutral,” is said to be entirely unworkable — destined to eliminate every valued program of government. And when they’re really stuck, budget protectionists will claim that even a reform that they ought to support for every economic and humanitarian reason is impossible because the budget couldn’t absorb the shock of the first year. The withdrawals of revenue dependency might kill the junkie.

When it comes to dropping Rhode Island’s state sales tax to 3%, as RI House bill 8039 and Senate bill 2919 would do, the problem is not so dramatic. To begin with, the companion bills would implement the change at the beginning of 2015, which maintains the higher tax rate through the summer tourist season and the holiday shopping season. (The latter period on the calendar might also help to reduce the likelihood that people would hold off on purchases in the months leading up to the tax reduction, while also producing a boost during a slower time of the year.)

The following chart, part of the RI Center for Freedom & Prosperity’s “complete solution,” shows the RI Center for Freedom & Prosperity’s suggested approach to managing the implementation of this unprecedented tax reform, taking advantage of the state government’s access to two respected economic modeling tools: the RI-STAMP model used by the Center and the REMI PI+ model used by the state’s Office of Revenue Analysis.

The total height of the column is the governor’s recommended general fund (state) revenue for the next fiscal year.

The dark gray block at the bottom is the $3.054 billion that would be under no risk at all, even if the state dropped its sales tax rate from 7% to 3% for the entire year and the reform had no dynamic effect increasing tax revenue somewhat by improving the economy.

The silver block is the $134.25 million that the state secures by starting the reform halfway through the fiscal year plus the dynamic revenue that the REMI PI+ model projects for the reform. (For a variety of reasons, the Center believes these results to be overly pessimistic. One very substantial reason is that the Office of Revenue Analysis assumed across-the-board cuts to make up for the reduced revenue, which bit into areas of spending that, they claim, have a strong benefit for the local economy and, therefore, the dynamic effects of the reform.)

The red block shows the portion of the revenue for which the state should have some plans to reduce spending if REMI’s pessimism turns out not to have been unreasonable. The top of this block is the budget that the Center recommends that the General Assembly actually pass.

The green block represents the added revenue that RI-STAMP projects the state will realize above the Center’s recommended budget. If legislators wish to minimize the effects of the reform, they can plan for spending and program increases that would go into effect as this revenue actually comes in.

The sliver of blue at the top of the column is the $28.9 million that the Center expects the state to have to trim from the governor’s recommended budget as an investment in the 3% sales tax reform.

The light-green block to the left represents the $224.5 million in savings that the Center’s Spotlight on Spendingreport identified in the governor’s proposed budget (spanning both his suggested revision for FY14 and spending for FY15). As the chart shows, these potential savings cover all but the most pessimistic $43 million at the bottom of the red block.

The next chart zooms in on the upper part of the column, with some explanation. Basically, the strategy calls for the state to pass an initial budget (of $3.3 billion in general revenue spending) and then follow the monthly cash flow reports from the Office of Revenue Analysis. If the dynamic effects of the more optimistic RI-STAMP model are proving to be the case, nice-to-have spending like grants and pilot programs can be phased in. If the pessimism of the REMI model is proving to be the case, reductions of a more fundamental (but still non-essential) nature can be phased in.

Click here for a PDF of these two charts and the full table of Spotlight on Spending recommendations.

Update: PolitiFact acknowledges that the major elements of my statement were indeed true, before RULING that the statement was “Mostly False”. Read their twisted logic here …

Read the full story – what the PolitiFact article did not tell you – below.

Commentary, April 4, 2014

Earlier this week our Center published its Spotlight On Spending report. That same day the Providence Journal published a related OpEd piece that I co-authored along with David Williams of the Taxpayers Protection Alliance, which partnered with the Center in creating and publishing the report.

PolitiFact, the Journal’s fact-checking unit, noticed a slight discrepancy in the description of a the same item that was referred in both my opinion piece and in the report. PolitiFact believes this semantic discrepancy is of significant enough public value to warrant an investigation; I do not. It completely misses the material reason why this item was included our report.

As it turns out, it was PolitiFact that made a significant error in mis-characterizing my original statement. See below for the explanation.

Sometime next week, PolitiFact will rule on the truth-fullness of my statement in the OpEd. Our Center believes in government transparency and applies that belief to our exchange with PolitiFact. It is important that interested readers know the whole story.

Questions and Clarifications Posed by PolitiFact’s Gene Emery

THREE SEPARATE EMAILS:

1) Hi Mike,I want to fact-check the statement in your commentary, “A grant for $5,000 went to teach an employee at a company that makes ornamental business card holders how to use Facebook and Twitter.” That seems to be referencing the part of the report that talks about “$5,000 to provide social media training for employees at Ahler’s Designs.” So it is one employee or several employees? And did the $5,000 just for teaching someone to use Facebook and Twitter, or was there more involved? If you could point me to your sources, that would useful. Thanks, — Gene Emery

2) That factoid was featured in your Journal commentary. Not only was it repeated in the Journal story the next day, it was played up prominently by Channel 10 and GoLocalProv.I asked you about it because you are the lead author of the commentary, and paying $5,000 to teach one person how to sign up for Facebook and Twitter, which millions have figured out for themselves, seems pretty outrageous. However the report, and the footnoted document, seems to tell a slightly different story: more than one employee and broader training in social media. Actually, according to the reference document in your own report, it’s 3 employees trained at $2,500 and 1 student trained at the same price. So is the report in error, did you misstate the facts in your commentary, or is your commentary referencing something else? –Gene

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3) In the interim, I spoke to the company. They say 3 employees and 2 students received 32 hours of training over eight weeks, making the argument that it’s important for today’s businesses to know the ins and outs of social media, and being a business using social media involves a lot more than setting up a personal Facebook account. I mention this because you might want to react to that argument. — Gene

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Full Response by Mike Stenhouse

We agree with PolitiFact that taxpayer dollars being spent on something that millions have figured out for themselves is outrageous. We question, however, the public service value of fact-checking the semantic difference between “an employee” and “employees’ when a much larger public policy question is at the core of the issue.

There was no mistake in either statement. However there was a mistake in PolitiFact’s characterization of my commentary piece in an email that asked me to respond to the alleged statement – “‘$5,000 to teach one person how to sign up for Facebook and Twitter’, which millions have figured out for themselves, seems pretty outrageous.” In my commentary, I never made that statement; I never used the term ‘sign-up’, but instead used ‘how to use’; nor did I say ‘one person’; I said ‘an employee’. For a fact-checking organization to call a statement I never made “outrageous”, is outrageous in and of itself.

The more superfluous descriptions of how that funding was used vary only in that the statement from the OpEd describes a subset of the broader and more inclusive statement from the report.

It is true that “an employee” received training, even if others received training as well

It is true that the Ahler’s Designs makes business card holders

It is presumably true that Facebook and Twitter were part of the larger social media training

The reason we included this item in our report, is not because of the amount of money spent per employee, as PolitiFact appears to be concerned with, but rather that any taxpayer dollars were spent in this regard in the first place. This spending was outrageous, regardless of whether or not the business owner feels that it was important for her business.

Either way, this scenario where many companies pay into a fund that gets re-distributed to just a few, is itself unfair, while also creating potential for cronyism and insider politics. In fact, an additional GWB post notes that in 2013, this same company, “Ahlers Design received $8,150 to train three employees; it also received $8,150 in youth bonus funding.” [http://www.rihric.com/news/news062013.htm] .

The lack of transparency and specificity in the GWB’s reporting apparently also has confused someone at Ahler’s or at GWB. The referenced source in our report indicates that four employees received training; yet Ahler’s stated to PolitiFact that five employees received training. Will this discrepancy be PolitiFact checked? Is this even an important distinction? Like the original premise of this PolitiFact investigation … I think not.

RI one of only five “Fat Tuesday” states!

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Rhode Island ranks among the five worst “Fat Tuesday States” when it comes to bloated interest expenses on debt per person, according to data released yesterday by Truth In Accounting, and commented on today by the Rhode Island Center for Freedom and Prosperity, a nonpartisan, state-based think tank. Taking on new bond projects would worsen this ranking.

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“Fat” states, according to the data, have high levels of interest payments per capital based on total debt, both state and local. Rhode Island suffers from a related debt burden of approximately $14,000 per person, about 50% higher than the 50-state average.

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According to data specially provided to the Center by Truth In Accounting, Rhode Island has seen a 60% increase in this ‘interest expense’ measure since 2006, more than twice the 28% average increase of the five fat states, and the largest increase of any state in the nation during this period, which, ironically, is a period that has seen interest rates dramatically decrease.

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“Not only do we spend-and-tax at levels significantly higher than our state can sustain, but we also pile massive debt burdens on the backs of our taxpayers,” said Mike Stenhouse, CEO for the Center. “These interest payments alone can crowd out spending on other critical budget areas such as education, infrastructure, and public assistance. Just another reason why a new repeal and roll back policy culture is needed in Rhode Island.”

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The Governor’s FY-2015 budget would add to this debt and interest expense with about $275 million in proposed new bond projects. This would mean that approximately $36 million in additional interest debt service payments would be imposed on the state’s budget, or another $36 per resident per year on top of an already worst “fat five” ranking.

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“With Lent beginning this week, perhaps the Ocean State should go on a leaner diet, instead of devouring even more fatty pork,” suggested Stenhouse.

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